The Old-School Liberal

“Freedom granted only when it is known beforehand that its effects will be beneficial is not freedom” — Friedrich Hayek

Romney Ignores Economic Adviser, Supports Fiscal “Stimulus”

Posted by Poorsummary on February 3, 2008

MankiwAs even the casual observer would know, virtually all of the Republican candidates are in favor of Bush’s fiscal stimulus package (with one notable exception). After all, what politician in his right mind would vote against sending $1,000 to every voter? Given the political faux paus of such a move, it’s no surprise that focus-group-fueled political machine Mitt Romney has joined the ranks of the neoconservative yes-men in supporting such a measure, in spite of the advice of one of his own economic advisers. As you read Mankiw’s analysis, ask yourself whether Romney thinks he knows better than the Harvard PhD economist who literally wrote the book on macroeconomics, or if he’s simply saying what the focus groups want to hear (here’s the link):

When designing a tax system and evaluating tax proposals, policy analysts have at least four goals in mind:

  1. Efficiency: The tax system should distort incentives as little as possible (and, in the case of externalities and Pigovian taxes, correct incentives when necessary).
  2. Intergenerational equity: The tax system should raise enough revenue so current generations do not unduly burden future generations.
  3. Egalitarianism: The tax system should try to achieve a more equal distribution of after-tax incomes.
  4. Stabilization: The tax system should help maintain the economy at full employment.

The current debate over fiscal stimulus involves trading off these goals. The stimulus package being discussed is mainly aimed at achieving goal 4, but it does so at the cost of sacrificing goals 1 and 2 to some degree. Efficiency is sacrificed because the phase out raises effective marginal tax rates and because the higher future taxes that result from the extra government debt will likely be distortionary. Of course, the phase out is there in order to achieve goal 3: This is the classic tradeoff between efficiency and equality.

Differences of opinion arise when policy analysts weight these goals differently. Advocates of fiscal stimulus put a large weight on goal 4. Critics of fiscal stimulus come in two varieties. One type of critic discounts goal 4 entirely because they are skeptical of Keynesian theories that underlie this goal. A second type of critic admits that goal 4 is legitimate in principle but believes that in the current environment macroeconomic stabilization is best left to monetary policy so fiscal policy can focus on goals 1 and 2. I am in this latter category.

Romney supporters, add this to your list of Romney’s conveniently adopted views (hint: abortion, gay rights, and federal education policy should already be there). Of course, he could really believe all the things he claims to– the political convenience of his changes in position could just be a coincidence…

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One Response to “Romney Ignores Economic Adviser, Supports Fiscal “Stimulus””

  1. The upshot is that low interest rates and Q3 are likely continue for a quite while, but not forever. Inflation is roughly at the target level, but employment is only slowly getting lower. An unemployment rate of 6.5 percent might not occur until well into 2014, or even later if the fiscal cliff causes serious economic problems early next year.

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